EFFICIENCY, EQUILIBRIUM, AND ASSET PRICING WITH RISK OF DEFAULT
Article Abstract:
We introduce a new equilibrium concept and study its efficiency and asset pricing implications for the environment analyzed by Kehoe and Levine (1993) and Kocherlakota (1996). Our equilibrium concept has complete markets and endogenous solvency constraints. These solvency constraints prevent default at the cost of reducing risk sharing. We show versions of the welfare theorems. We characterize the preferences and endowments that lead to equilibria with incomplete risk sharing. We compare the resulting pricing kernel with the one for economies without participation constraints: interest rates are lower and risk premia depend on the covariance of the idiosyncratic and aggregate shocks. Additionally, we show that asset prices depend only on the valuation of agents with substantial idiosyncratic risk. Keywords: Endogenous solvency constraints, risk sharing, participation constraints, default risk, asset pricing.
Publication Name: Econometrica
Subject: Mathematics
ISSN: 0012-9682
Year: 2000
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Getting to a competitive equilibrium
Article Abstract:
A random price adjustment model has been proposed for a decentralized exchange economy wherein the commodity vector held by an agent, rather than the whole economy, determines the agent's trades and the resulting price changes. It has been shown that the model's price path will closely resemble the path of the tatonnement process and remain close to the limit price if profitability is arbitrarily set at one. Assuming a stable price adjustment role throughout the trading process, the economy will approach a competitive equilibrium. However, this assumption fails to hold when applied to classical examples of exchange economies.
Publication Name: Econometrica
Subject: Mathematics
ISSN: 0012-9682
Year: 1996
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Automobile prices in market equilibrium
Article Abstract:
Techniques for the empirical analysis of the demand and supply of differentiated product markets are used to study the economic equilibrium in the US automobile industry. The main objective is to derive estimates of demand and cost parameters for a class of oligopolistic differentiated product markets. Cost and demand parameters for all automobile models marketed over a period of twenty years were obtained when the techniques were used on the US automobile industry.
Publication Name: Econometrica
Subject: Mathematics
ISSN: 0012-9682
Year: 1995
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